Money Basics & Measuring Money

1. Money Basics& Measuring Money Money and Banking - Dr. D. Foster

2. The functions of money • The functions money serves: • medium of exchange. • unit of account. • store of value. • std. of deferred value. • Need money serve all these functions? Money and Banking - Dr. D. Foster

3. What isn’t money? Wealth is not money. Income is not money. A credit card is not money. • What about . . . • Stored value cards? • Electronic money? • “Local” currencies? Money and Banking - Dr. D. Foster

4. History • Favorable characteristics • portable, durable, recognizable, scarce, commodity • wheat, shells, precious metals • Yap stone wheels • How do we get to paper? • commodity, representative, fiat • U.S. and the “gold standard.” • Deciding on denominations and coins vs. paper. • Evolution to e-money. Money and Banking - Dr. D. Foster

5. The G-man • Mint coins to create standards of purity. • Revenue source.[Seignorage] • Beware of “debasing.” • Bank issued “notes” as money. • U.S. government - “greenbacks.” • Gold standard - 1879 to 1933/1971. • Created Federal Reserve in 1913. Money and Banking - Dr. D. Foster

6. The Continental Story • June, 1775 – 2 million Spanish dollars in bills of credit authorized. “A wagon load of money will scarcely purchase a wagon load of provisions”. • 12 colonies pledged to redeem from 1779 to 1782. • Total money supply est. at 12 million Spanish dollars. • End of 1775 – 6 million Continentals issued. • End of 1779 – 242 million issued!! [26C=$1] • British added counterfeits. • End of 1781, 168C = $1. Money and Banking - Dr. D. Foster

7. Measurement • How? - Liquidity of financial assets. • M1 = [Coins and] currency in circulation (C) + “transactions deposits” (D) + TC • M2 = M1 + SDS +TDS + MMMFIndividual • M3 = M2 + TDL + MMMFInstitutional + Euro$ + RP Fed Regulation D Money and Banking - Dr. D. Foster

8. The Monetary Base • Monetary Base (MB) = C + bank reserves (R) • Federal Reserve has perfect control over MB: • Prints currency. • All reserves are currency or deposits at the Fed. • M1 is highly correlated to MB. • M1 relates to economy [M*V=P*Y]. • MB plays a role in the government’s budget:G = T + Bonds + MB Money and Banking - Dr. D. Foster

9. Monetary Data - Currency Money and Banking - Dr. D. Foster

10. Monetary Data – M1 Money and Banking - Dr. D. Foster

11. Monetary Data – Travelers Checks Money and Banking - Dr. D. Foster

12. Monetary Data – Demand Deposits Money and Banking - Dr. D. Foster

13. Monetary Data – DD and OCD Money and Banking - Dr. D. Foster

14. Monetary Data – OCD (banks & tot.) Money and Banking - Dr. D. Foster

15. Monetary Data – DD, OCD, Total Money and Banking - Dr. D. Foster

16. Monetary Data – M2 Money and Banking - Dr. D. Foster

17. Monetary Data – MZM Money and Banking - Dr. D. Foster

18. Monetary Data – M2 and MZM Money and Banking - Dr. D. Foster

19. Monetary Data – Monetary Base Money and Banking - Dr. D. Foster

20. Sweep Programs and M1 Sweep programs- the shifting of checking deposits to MMDAs to … avoid reserve requirements. provide additional income to customer. The Fed allowed sweeps beginning in 1994. Sweep programs have distorted the meaning of the M1 measure of money.

21. Monetary Data – M1 and Sweeps Money and Banking - Dr. D. Foster

22. Rothbard on Money • Money is different than coal … • What is true if the supply of coal rises? • What is true if the supply of money rises? • Is there a right amount of money? • What if the money supply doubled? • Are there economic interests “agitating” for a decline in the money supply? • Is it wasteful to mine for gold and silver? • What is the significance of a commodity as money? Money and Banking - Dr. D. Foster

23. Rothbard on Money • What about counterfeiting money? • Harms those with “real” money. • Hard to do with commodity like gold. • Easy to do with paper/fiat money. • And, if the government has a monopoly? • What has the government done to our money? • We’ve forgotten that the name meant a weight. • Gov’t force through “legal tender” laws. • Now, gov’t can finance spending withoutraising taxes or borrowing funds! Money and Banking - Dr. D. Foster

24. The end of gold The end of truth The end of order • The gold standard and wartime. • Suspensions to keep banks afloat & gov’t financing going. • Wartime inflation only occurs in paper, not in gold!! • For U.S. – Revolutionary War, War of 1812, Civil War. • Gold coins and paper circulated until 1933. • This provided some limit on arbitrary money creation. • Gold contracts (or, clauses) thwart government. • Specify payment in $ equivalent of some amount of gold. • FDR cancels all gold clauses; the case of the Halle Building. Money and Banking - Dr. D. Foster

25. Need a National Currency? Dollarization - Use another country’s currency as your medium of exchange. $ - Ecuador, El Salvador, Timor, British Virgin Islands, Panama € - Vatican City, Monaco, Andorra Currency board- the national currency is backed by an equal amount of a foreign currency. $ - Hong Kong, Bermuda, East Caribbean $ € - Bulgaria, Estonia, Lithuania Currency union - A group of countries adopt a common currency. Euro/West Africa/Caribbean

26. Money Basics& Measuring Money Money and Banking - Dr. D. Foster

27. Yap Stone Wheels Money and Banking - Dr. D. Foster